Will Your Uncle Sam Be Dictating Your Retirement Funds?

Have you been tracking the buzz that our government is considering the takeover of our retirement funds?

There has been talk since last fall, but, according to Money Morning, this talk is leading to action. In late January, both the U.S. Treasury Department and the Department of Labor announced plans to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other “steady” payment streams backed by U.S. government bonds.

Can they do this?

Our 401(k) and IRA investments belong to us. We invest them as we wish and live with the results. Can our government dictate how these investments are made? Evidently so. I know that I have quit saying, “they would never do that.”

Why would they do this?

With spiraling national debt at $14 trillion and a projected deficit of $1.35 trillion for this year alone, politicians are looking for money. Japan and China can no longer be counted on as dependable buyers of U. S. government debt, and the U. S. Federal Reserve is supposed to stop buying Treasury bonds. So, as our administration scrambles for debt buyers, their eyes stop on the $3.6 trillion sitting in U.S. retirement plans, including 401(k) plans.

How can they justify it?

After reading the story in Money Morning and My Fox, I will try to condense the rationale our administration is considering.

We may be hearing something like this: “Our current system is commonly called a defined contribution plan, meaning the eventual retirement benefit is based on how much was contributed and how well those investments performed. This system is different from the traditional defined benefit plan in which the retirement benefit is defined by salary history and years of service. Most government retirees, all Social Security beneficiaries and recipients of traditional pensions receive defined benefit plans.”

The rationale continues: “Because of the volatility of the market, as evidenced by the recent downturn in which nearly every 401(k) and IRA lost value, our future retirees would be well served by putting a portion of their portfolio into an annuity type investment that will guarantee payouts, much like the defined pension plans of old. One such type of investment would be a Government Bond. Everyone wins under this scenario: future retirees have greater security and government has buyers for its debt.”

What do I think?

My first reaction is one of incredulity. The issue is not what is best for future retirees; it is who gets to make that decision. I am a big boy and able to live with my decisions, even if they don’t work out the way I like. For my government to dictate what is best for me leaves a stench of socialism, if not communism.

The secondary issue is whether this intervention will actually benefit future retirees. I would answer that one with this question, “Would you loan money to someone who is deeply in debt, on a spending frenzy, and cannot get credit elsewhere?” I wouldn’t either. When the same government that manages Social Security wants to manage my future retirement payouts in the form of Government bonds, I get really queasy. Why? Either the money won’t be there to pay me, or inflation will have outpaced the return of the bonds, making any future payout worth very little.

What can we do?

I started this post by asking if you had been tracking this story. With the announcement that public comment periods are being planned before implementing regulations, the story is becoming fact. We need to be vigilant about tracking it and speaking up when opportunities arise. We can expect our government to frame the argument with innocuous language that will sound like they are watching out for our best interests, but will hide the downside of these changes.

Jesus once told his disciples, Mat 10:16 “Behold, I am sending you out as sheep in the midst of wolves, so be wise as serpents and innocent as doves.”

It seems to me that we need lots of wisdom, salted heavily with innocence, as we live among wolves.

It doesn’t seem like the current environment would support such a radical move, but like you I’ve long ago stopped saying “they would never do that”. The ongoing socialization of our lives and livelihoods is a saddening trend. It is nothing short of the enslavement of each citizen to every other citizen, which is no more moral or positive than any other sort of enslavement.

Ethan,
I certainly hope the current environment would not support such a radical move, but the environment is ever changing. We live in challenging times: times that require wisdom and savvy; times that require us to take a stand while the world around us is ever shifting.

Fortunately, when we stand on the rock of Christ, we don’t have to worry about shifting sands. He never changes.

By the way, I noticed you used the word “enslavement” twice. Sort of the opposite of freedom, isn’t it?

Yes, it is the opposite. As someone once pointed out, “What difference is it to me if a decision is forced upon me by a dictator or by half of my neighbors? Either way my right to free, peaceful action has been nullified.”

I view voluntary social cooperation as a huge boon to the human race, but I view aggression and fraud as evils regardless of what banner flies over them. Seizing the results of someone’s labor is equivalent to seizing hours from them and directing them to carry on activities of your choosing. That is immoral: half my neighbors have no more right to do this than does one dictator.

It’s interesting to note that our national debt is 14 trillion dollars which equates to the total amount in IRAs and 401(k)s. Is this a coincidence?

The Chinese are less enthusiastic these days to buy our debt and are shoring up their own domestic economy to make themselves less dependent upon tapped out American consumers. The only mechanism the U.S. has to entice fresh buying of treasury bonds is interest rates. Raising interest rates in our current economic environment would be economic suicide. Can you imagine what would happen to whats left of the real estate market if that happened?

IRAs and 401(k)s have a giant bulls-eye on them. If they can force people into annuities backed by long-term treasuries, in this low interest rate environment, they win and IRA and 401(k) holders lose. Annuities are a much better deal after interest rates have shot up to double digits and begin a long-term decline. Annuities are an insurance product and we need to look no further than AIG to question the solvency of that industry.

Fortunately, we have choices as well. They may not be easy choices in all cases but we can’t deny we have them.

Some many have the opportunity of taking their money out of their plans by paying taxes and penalties while others may be able to take a portion of the money out in the form of loans. Both groups could then use that money to hedge against the inflation risk by purchasing tangibles.

Another option would be to acquire foreign real estate through an IRA. It is doubtful Uncle would require the repatriation of money invested in foreign real estate due to the illiquid nature of the investment.